----

| /X/ | QUARTERLY      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      FOR THE QUARTERLY PERIOD ENDED September 30,  2009 |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

| /      / | TRANSITION      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934 |
|----------|----------------------------------------------------------------------------------------------|

Z TRIM HOLDINGS, INC.

|        ILLINOIS                                                    |        36-4197173                               |
|-------------------------------------------------------------------------|------------------------------------------------------|
| (State      or Other Jurisdiction ofIncorporation      or Organization) |        (I.R.S. EmployerIdentification      No.) |

----

----

----

----

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OFMARKET RISKS

| 1.   | As      of September 30, 2009, we did not maintain effective controls over the      control environment.  Specifically, we have not developed and      effectively communicated to our employees our accounting policies and      procedures.  This has resulted in inconsistent      practices.   Since these entity level programs have a pervasive      effect across the organization, management has determined that these      circumstances constitute a materialweakness. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As      of September 30, 2009, we did not maintain effective controls over      financial statement disclosure. Specifically, controls were not designed      and in place to ensure that all disclosures required were originally      addressed in our financial statements.   Accordingly, management      has determined that this control deficiency constitutes a material      weakness. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

| 3(i) | Articles      of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 2.1 to the      Company's Form 10-SB filed on August 21, 2000, and as Exhibit 3.3 to the      Company's Form 10-QSB filed on August 16, 2004, and incorporated herein by      reference). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(ii) | Bylaws      of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the      Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the      Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the      Company’s Form 8-K filed on November 16, 2007, and incorporated herein by      reference). |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Steve      Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form      10-QSB for the quarter ending June 20, 2006 and incorporated herein by      reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Brian      Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit      10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated      herein by reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Intentionally      left blank. |
|------|--------------------------------|

| 10.4 | Z      Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the      Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004      and approved by its Shareholders on that date and incorporated herein by      reference). |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1* | Statement      Under Oath of Principal Executive Officer of the Company pursuant to      Section 302 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 31.2* | Statement      Under Oath of Principal Financial Officer of the Company pursuant to      Section 302 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 32.1* | Statement      Under Oath of Principal Executive Officer of the Company pursuant to      Section 906 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 32.2* | Statement      Under Oath of Principal Financial Officer of the Company pursuant to      Section 906 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   | PAGE   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
| Consolidated      Balance Sheets at September 30, 2009 (unaudited) and December 31,      2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   F-1 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
| Consolidated      Statements of Operations for three and nine months ended as    of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |            |   |   |
| September      30, 2009 and 2008      (unaudited)                                                                                                                                              | F-3             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
| Consolidated      Statements of Cash Flows as of September 30, 2009 and 2008      (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | F-4             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |   |   |   |   |   |   |   |   |   |
| Notes      to Consolidated Financial Statements as of September 30, 2009 and 2008      (unaudited)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | F-5             |

----

| Z      TRIM HOLDINGS, INC.                                                                                      |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|-----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      BALANCE SHEETS                                                                                |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| SEPTEMBER  30,    2009                                                                                |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| ASSETS                                                                                                          |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    | (Unaudited)                                                                                                                                                         |    |                                                                                                               |
|                                                                                                            |                                                                                                    | 9/30/2009                                                                                                                                                           |    | 12/31/2008                                                                                                         |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Current      Assets                                                                                             |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Cash      and cash equivalents                                                                                  |                                                                                                    |  $               69,443                                                             |    |  $            592,696                             |
| Accounts      receivable (net of allowance of  $0 and $10,067                                         |                                                                                                    |                                                                                                                                                                |    |
|         as      of September 30, 2009 and  December 31, 2008) |                 102,619 |                                                                                                                                                                | 206,231 |
| Inventory                                                                                                       |                                                                                                    |                 110,369                                                             |    |                 182,971            |
| Prepaid      expenses and other assets                                                                          |                                                                                                    |                 117,015                                                             |    |                   86,445 |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Total      current assets                                                                                       |                                                                                                    |                 399,446                                                             |    |             1,068,343                                  |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Property      and equipment, net                                                                                |                                                                                                    |             3,670,228                                                                                   |    |             4,061,436                                  |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Long      Term Assets                                                                                           |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Deposit      on Fixed Asset                                                                                     |                                                                                                    |                            - |    |                 240,000            |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Other      Assets                                                                                               |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
|         Prepaid      Loan  Cost - Long Term, Net              |                                                                                                    |                 505,636                                                             |    |                 880,650            |
| Deposits                                                                                                        |                                                                                                    |                   15,003                                                  |    |                   14,453 |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| Total      other assets                                                                                         |                                                                                                    |                 520,639                                                             |    |                 895,103            |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |
| TOTAL      ASSETS                                                                                               |                                                                                                    |  $         4,590,313                                                                                              |    |  $         6,264,882                                             |
|                                                                                                            |                                                                                                    |                                                                                                                                                                |    |                                                                                                               |

----

| Z      TRIM HOLDINGS, INC.                                                                                        |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      BALANCE SHEETS                                                                                  |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| SEPTEMBER  30,    2009                                                                                  |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| LIABILITIES      AND STOCKHOLDERS' EQUITY (DEFICIT)                                                               |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   | (Unaudited)                                                                                                                                         |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   | 9/30/2009                                                                                                                                           |                                                                   | 12/31/2008                                                                                                                                                          |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Current      Liabilities                                                                                          |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Accounts      payable                                                                                             |                                                                   |  $            643,977                                                              |                                                                   |  $            544,325                                                                              |
| Accrued      expenses and other                                                                                   |                                                                   |                 566,211                                             |                                                                   |                 335,718                                                             |
|         Derivative      Liabilities                                       |                                                                   |             4,912,441                                                                   |                                                                   |                            - |
| Total      Current Liabilities                                                                                    |                                                                   |             6,122,629                                                                   |                                                                   |                 880,043                                                             |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Long      Term Liabilities                                                                                        |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|              Convertible      Notes Payable, Net |                                                                   |             3,400,049                                                                   |                                                                   |             2,559,736                                                                                   |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Total      Long Term Liabilities                                                                                  |                                                                   |             3,400,049                                                                   |                                                                   |             2,559,736                                                                                   |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Total      Liabilities                                                                                            |                                                                   |             9,522,678                                                                   |                                                                   |             3,439,779                                                                                   |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Stockholders'      Equity (Deficit)                                                                               |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                     |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| shares;      issued and outstanding 2,760,271 and                                                                 |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| 2,597,879      shares, September 30, 2009 and December 31, 2008                                                   |                                                                   |                         138 |                                                                   |                         130                 |
| respectively                                                                                                      |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Additional      paid-in capital                                                                                   |                                                                   |           75,892,575                                                                              |                                                                   |           74,487,848                                                                                              |
| Accumulated      deficit                                                                                          |                                                                   |         (80,825,078)                                                                                        |                                                                   |         (71,662,875)                                                                                                        |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Total      Stockholders' Equity (Deficit)                                                                         |                                                                   |            (4,932,365)                                                                       |                                                                   |             2,825,103                                                                                   |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                         |  $         4,590,313 |                                                                                                                                                |  $         6,264,882 |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
|------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      STATEMENTS OF OPERATIONS (Unaudited)     |   |   |                                Three months ended   |   | Nine      months ended                                                                                        |   |
|                                                       |   |   |                      September      30,                                           |   |                                                                                                          |   |         September 30,                                                                               |   |                                                                                                          |
| FOR      THE NINE MONTHS ENDED SEPTEMBER 30                |   |   | 2009                                                                                                                                                                                       |   | 2008                                                                                                          |   | 2009                                                                                                          |   | 2008                                                                                                          |
| REVENUES:                                                  |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
|   Products                                       |   |   |  $     150,050                                                                                                                                               |   |  $     264,485                                                                  |   |  $     440,979                                                                  |   |  $     502,792                                                                  |
|   Services                                       |   |   |                   -                                                                              |   |                   - |   |                   - |   |                   - |
|     Total      revenues                |   |   |         150,050                                                                                                                                    |   |         264,485                                                       |   |         440,979                                                       |   |         502,792                                                       |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| COST      OF REVENUES:                                     |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
|   Products                                       |   |   |         458,682                                                                                                                                    |   |         604,765                                                       |   |      1,211,339                                                                       |   |      1,811,500                                                                       |
|     Total      cost of revenues        |   |   |         458,682                                                                                                                                    |   |         604,765                                                       |   |      1,211,339                                                                       |   |      1,811,500                                                                       |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| GROSS      MARGIN                                          |   |   |       (308,632)                                                                                                                                              |   |       (340,280)                                                                 |   |       (770,360)                                                                 |   |    (1,308,708)                                                                                 |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| OPERATING      EXPENSES:                                   |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| Selling,      general and administrative                   |   |   |         843,536                                                                                                                                    |   |         846,688                                                       |   |      3,511,874                                                                       |   |      3,576,485                                                                       |
| Impairment      of intangible assets                       |   |   |                   -                                                                              |   |                   - |   |                   - |   |         136,668                                                       |
| Amortization      of intangible assets                     |   |   |                   -                                                                              |   |                   - |   |                   - |   |             3,333                                 |
| Loss/(Gain)      on asset disposals, net                   |   |   |             9,463                                                                                                              |   |                   - |   |         126,651                                                       |   |         (74,987)                                                      |
|     Total      operating expenses      |   |   |         852,999                                                                                                                                    |   |         846,688                                                       |   |      3,638,525                                                                       |   |      3,641,499                                                                       |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| OPERATING      LOSS                                        |   |   |    (1,161,631)                                                                                                                                                              |   |    (1,186,968)                                                                                 |   |    (4,408,885)                                                                                 |   |    (4,950,207)                                                                                 |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| OTHER      INCOME (EXPENSES):                              |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| Rental      and other income                               |   |   |                220                                                                                              |   |             5,342                                 |   |             3,826                                 |   |           23,005                                            |
| Interest      income                                       |   |   |                   -                                                                              |   |             2,678                                 |   |                226                 |   |           18,286                                            |
| Interest      expense                                      |   |   |           (2,456)                                                                                                                        |   |             5,439                                 |   |           (5,683)                                           |   |              (450)                           |
| Interest      expense - Note Payable                       |   |   |       (625,938)                                                                                                                                              |   |         (83,400)                                                      |   |    (1,515,138)                                                                                 |   |       (100,554)                                                                 |
| Derivative  (loss)      gain                     |   |   |         510,001                                                                                                                                    |   |                   - |   |       (910,990)                                                                 |   |                   - |
| Settlement      (loss) gain                                |   |   |                   -                                                                              |   |       (615,002)                                                                 |   |       (195,608)                                                                 |   |       (582,111)                                                                 |
|     Total      other income (expenses) |   |   |       (118,173)                                                                                                                                              |   |       (684,943)                                                                 |   |    (2,623,367)                                                                                 |   |       (641,824)                                                                 |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| LOSS      FROM CONTINUING OPERATIONS                       |   |   |  $(1,279,804)                                                                                                                                                                         |   |  $(1,871,911)                                                                                            |   |  $(7,032,252)                                                                                            |   |  $(5,592,031)                                                                                            |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| NET      LOSS                                              |   |   |  $(1,279,804)                                                                                                                                                                         |   |  $(1,871,911)                                                                                            |   |  $(7,032,252)                                                                                            |   |  $(5,592,031)                                                                                            |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| Net      Loss per Share from continuing operations         |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
|  -      Basic and Diluted                             |   |   |  $         (0.46)                                                                                                                        |   |  $         (0.78)                                           |   |  $         (2.60)                                           |   |  $         (2.20)                                           |
| Net      Loss per Share - Basic and Diluted                |   |   |  $         (0.46)                                                                                                                        |   |  $         (0.78)                                           |   |  $         (2.60)                                           |   |  $         (2.20)                                           |
|                                                       |   |   |                                                                                                                                                                                       |   |                                                                                                          |   |                                                                                                          |   |                                                                                                          |
| Weighted      Average Number of Shares Basic and Diluted   |   |   |      2,756,686                                                                                                                                                    |   |      2,401,879                                                                       |   |      2,705,827                                                                       |   |      2,542,638                                                                       |

----

| Z      TRIM HOLDINGS, INC.                                                                                             |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      STATEMENTS OF CASH FLOWS                                                                             |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| FOR      THE NINE MONTHS ENDED SEPTEMBER 30                                                                            | 2009                                                                                                                                                                                                    |   |  2008                                                                                                                                                                                              |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                              |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Net      loss                                                                                                          |                 (7,032,252)                                                                                             |   |                 (5,592,031)                                                                                             |
| Adjustments      to reconcile loss from continuing operations to                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| net      cash used in operating activities:                                                                            |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Depreciation                                                                                                           |                      720,760                                                                   |   | 736,915                                                                                                                                                                                                 |
| Loss      on asset disposal                                                                                            |                      126,651                                                                   |   |                        40,727                                                        |
| Change      in  Derivative Liability, net of bifurcation                                                     |                      910,990                                                                   |   |                                  - |
| Provision      for bad debt                                                                                            |                                  - |   |                           9,062                                       |
| Stock      based compensation                                                                                          |                      565,844                                                                   |   |                      262,003                                                                   |
| Stock      based compensation - warrants                                                                               |                      526,454                                                                   |   |                                  - |
| Shares      and Warrants issued for services                                                                           |                           6,263                                       |   |                      230,000                                                                   |
| Shares      issued for director fees                                                                                   |                        46,201                                                        |   |                                  - |
| Shares      and Warrants issued for debt                                                                               |                      195,608                                                                   |   |                                  - |
| Amortization      on discounts on debt                                                                                 |                      840,313                                                                   |   |                                  - |
| Loan      Cost Amortization                                                                                            |                      375,014                                                                   |   |                        67,644                                                        |
| Impairment      of intangible assets                                                                                   |                                  - |   |                      136,668                                                                   |
| Stock      and warrant settlements                                                                                     |                                  - |   |                      322,903                                                                   |
| Non-cash      settlements                                                                                              |                                  - |   |                    (111,792)                                                                             |
| Changes      in operating assets and liabilities                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Accounts      receivable                                                                                               |                      103,612                                                                   |   |                    (189,915)                                                                             |
| Inventory                                                                                                              |                        72,602                                                        |   |                      194,513                                                                   |
| Prepaid      expenses and other assets                                                                                 |                       (23,120)                                                            |   |                    (171,434)                                                                             |
| Increase/(Decrease)      in:                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Accounts      payable and accrued expenses                                                                             |                      907,147                                                                   |   |                    (297,397)                                                                             |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      USED FOR OPERATING ACTIVITIES                                                                                |                 (1,657,913)                                                                                             |   |                 (4,362,134)                                                                                             |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                              |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Purchase      of Fixed Assets                                                                                          |                    (313,205)                                                                             |   |                       (45,919)                                                            |
| Proceeds      from asset disposals                                                                                     |                        97,000                                                        |   |                              200                       |
| CASH      USED FOR INVESTING ACTIVITIES                                                                                |                    (216,205)                                                                             |   |                       (45,719)                                                            |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM FINANCING ACTIVITES                                                                               |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Net      proceeds from sales of stock                                                                                  |                                  - |   |                   3,110,274                                                                                   |
|  Common      Stock Redemption                                                                                     |                                  - |   |                       (37,000)                                                            |
| Borrowing      on debt                                                                                                 |                   1,346,500                                                                                   |   |                         -                                                       |
| Exercise      of options and warrants                                                                                  |                           4,365                                       |   |                                  - |
| CASH      PROVIDED BY FINANCING ACTIVITIES                                                                             |                   1,350,865                                                                                   |   |                   3,073,274                                                                                   |
| Net      cash and cash equivalents provided (used) by discontinued      operations                                     |                                  - |   |                              484                       |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| NET      (DECREASE)INCREASE IN CASH                                                                                    |                    (523,253)                                                                             |   |                 (1,334,095)                                                                                             |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      AT BEGINNING OF YEAR                                                                                         |                      592,696                                                                   |   |                   2,436,580                                                                                   |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      AT THE QUARTER ENDED SEPTEMBER 30                                                                            |                        69,443                                                        |   |                   1,102,485                                                                                   |
|                                                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Supplemental      Disclosures of Cash Flow Information:                                                                |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Interest      paid                                                                                                     |                                  - |   |                              402                       |
| Interest      paid in stock                                                                                            |                                                                                                                                                                                                    |   |                      100,554                                                                   |
|         Common      Stock & Warrants issued for services                   |                                                                                                                                                                                                    |   |                      230,000                                                                   |
|         Common      Stock issued for settlement                                |                                  - |   |                   1,353,700                                                                                   |
|         Transfer      from Deposit on Fixed Assets to Construction in Progress |                      240,000                                                                   |   |                                  - |
|         Cummulative      Effect - Adoption of EITF07-5                         |                   2,129,951                                                                                   |   |                                  - |
|         Convertible      Debt issued for Settlement of AP                      |                      525,000                                                                   |   |                                                                                                                                                                                                    |
|         Discount      on Convertible Debentures                                |                   1,871,500                                                                                   |   |                                                                                                                                                                                                    |

----

|   | · |     Level      one — Quoted market prices in active markets for identical assets or      liabilities; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   |        · |     Level      two — Inputs other than level one inputs that are either directly or      indirectly observable; and |
|--------|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|  ·   | Level      three — Unobservable inputs developed using estimates and assumptions,      which are developed by the reporting entity and reflect those assumptions      that a market participant woulduse. |
|--------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                             |                                                                          |   |                                                                          |
|----------------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                             | 9/30/2009                                                                     |   | 12/31/2008                                                                    |
| Raw      materials               |  $      18,097                             |   |  $      35,471                             |
| Packaging                        |             2,114 |   |             1,114 |
| Work-in-process                  |          10,494                  |   |             1,879 |
| Finished      goods              |          70,834                  |   |        133,649                             |
| Other      Inventory             |             8,830 |   |          10,858                  |
|   Total      inventory |  $    110,369                                        |   |  $    182,971                                        |
|                             |                                                                          |   |                                                                          |

----

|                                             |   | 9/30/2009    |   | 12/31/2008   |
|--------------------------------------------------|--------|--------------|--------|--------------|
| Production,      engineering and other equipment |   | $5,646,779   |   | $5,301,635   |
| Leasehold      improvements                      |   | $2,822,834   |   | $2,801,053   |
| Office      equipment and furniture              |   | $577,226     |   | $598,860     |
| Computer      equipment and related software     |   | $140,246     |   | $140,245     |
| Construction      in process - Equipment         |   | $0           |   | $53,361      |
| Construction      in process - Leasehold Impr    |   | $0           |   | $18,855      |
|                                             |   | $9,187,085   |   | $8,914,009   |
| Accumulated      depreciation                    |   | ($5,516,857) |   | ($4,852,573) |
| Property      and equipment, net                 |   | $3,670,228   |   | $4,061,436   |

| Depreciation      expense was $200,665 and $257,933 for the three months ended September 30,      2009 and September 30, 2008 respectively.  Depreciation expense      was $720,760 and $736,915 for the nine months ended September 30, 2009 and      September 30, 2008 respectively.  |   |   |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |

|                                    | 9/30/2009                                                                                                                              |   | 12/31/2008                                                                                               |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|
| Accrued      legal                      |  $                     - |   |  $                - |
| Accrued      payroll and taxes          |                 11,531                                 |   |            31,795                                 |
| Accrued      settlements                |                 38,000                                 |   |          100,000                                            |
| Accrued      Interest                   |               423,900                                            |   |          124,090                                            |
| Accrued      expenses and other         |                 92,780                                 |   |            79,833                                 |
| Total      accrued expenses & other |  $           566,211                                                       |   |  $      335,718                                                       |
|                                    |                                                                                                                                   |   |                                                                                                     |

----

----

|                              |   | September      30, 2009 |      | December      31, 2008 |
|-----------------------------------|--------|-------------------------|-----------|------------------------|
|                              |   |                    |      |                   |   |   |
| Common      stock warrants        |   |                    | 1,998,236 |                   |   | - |
| Embedded      conversion features |   |                    | 2,914,205 |                   |   | - |
|                              |   |                    |      |                   |   |   |
| Total                             |   | $                       | 4,912,441 |                   | $ | - |

|                                  |   | 9/30/2009                                                                                                                 |                                                                                                     |   | 12/31/2008                                                                                                                |                                                                                                           |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                                                      | Weighted                                                                                                 |   |                                                                                                                      | Weighted                                                                                                       |
|                                  |   | Number                                                                                                                    | Average                                                                                                  |   | Number                                                                                                                    | Average                                                                                                        |
|                                  |   | of                                                                                                                        | Exercise                                                                                                 |   | of                                                                                                                        | Exercise                                                                                                       |
|                                  |   | Shares                                                                                                                    | Price                                                                                                    |   | Shares                                                                                                                    | Price                                                                                                          |
| Outstanding      at beginning of year |   |         431,073                                                                   |  $         32.04                                       |   |         553,184                                                                   |  $         31.20                                             |
| Granted                               |   |      1,320,000                                                                                   |  $           0.45                            |   |             3,333                                             |  $           8.10                                  |
| Exercised                             |   |                     - | $                      - |   |                     - |  $                      - |
| Expired      and Cancelled            |   |       (328,511)                                                                             |  $         31.27                                       |   |       (125,435)                                                                             |  $         27.71                                             |
| Outstanding      at end of period     |   |      1,422,562                                                                                   |  $           2.91                            |   |         431,082                                                                   |  $         32.04                                             |
|                                  |   |                                                                                                                      |                                                                                                     |   |                                                                                                                      |                                                                                                           |
| Exercisable      at end of period     |   |      1,422,562                                                                                   |  $           0.66                            |   |         429,415                                                                   |  $         32.13                                             |
|                                  |   |                                                                                                                      |                                                                                                     |   |                                                                                                                      |                                                                                                           |

----

|                                                | 2009                                                                                                                          |
|-----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
| Weighted      average fair value per option granted |  $                   0.43 |
| Risk-free      interest rate                        |     1.99      - 2.99%                                                                                     |
| Expected      dividend yield                        |                   0.00%             |
| Expected      lives                                 |               1      - 2.5                              |
| Expected      volatility                            | 130.25      - 250.50%                                                                                                         |

|                  |   |                                                                                                                                                                                                    |   | Weighted                                                                                    |   |                                                                                                                                                                          |   |                                                                                                                                                          |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                    |   | Average                                                                                     |   | Weighted                                                                                                                                                                      |   |                                                                                                                                                          |
| Range      of         |   |                                                                                                                                                                                                    |   | Remaining                                                                                   |   | Average                                                                                                                                                                       |   |                                                                                                                                                          |
| Exercise              |   | Options                                                                                                                                                                                                 |   | Contractual                                                                                 |   | Exercise                                                                                                                                                                      |   | Options                                                                                                                                                       |
| Prices                |   | Outstanding                                                                                                                                                                                             |   | Life                                                                                        |   | Price                                                                                                                                                                         |   | Exercisable                                                                                                                                                   |
| $0.01-$1.50           |   |        1,320,000                                                                                                                                                     |   |              4.9           |   |  $   0.42                                                                                                                                                 |   |         1,320,000                                                                                                     |
| $1.51-$3.00           |   |                        -                                                             |   |                - |   |  $         -                                                                                                                |   |                        -                   |
| $3.01      & over |   |                                      102,562 |   |              1.3           |   |                              $    2.49 |   |                               102,562 |
|                  |   |                                   1,422,562                 |   |              4.6           |   |                              $    0.57 |   |                             1,422,562           |

| Year Ended | Rentals                                                                                  |
|------------|------------------------------------------------------------------------------------------|
|       |               2009 |              286,433 |
|       |               2010 |              254,900 |
|       |               2011 |                63,000 |
|       |               2012 |                         - |
|       |                                                                                     |  $           604,333 |
|       |                                                                                     |   |

----